Size, value, momentum, low volatility, and more recently, liquidity, are on the list of so-called factor strategies that when harnessed, can supposedly deliver risk-adjusted returns superior to those weighted by market cap.

But does the dog hunt? Michael McNiven, managing director and portfolio manager of registered advisory firm Cumberland Advisors, put the question to a panel of factor experts at the Inside Smart Beta conference on Wednesday. Mo Haghbin of OppenheimerFunds, Ben Lavine of 3D Asset Management, and Luke Smart of Dimensional Fund Advisors--all of whom have dogs in the smart-beta fight--opined on the efficacy of the different single-factor and multi-factor strategies and advised attendees how to use them.

One interesting view from Lavine: All factor strategies fit into one of two "super categories": value or sentiment. "Value is anything that is connected to price as a divisor. Sentiment is not as well-defined but seeks to capture success," said Lavine. Think momentum and earnings revisions. Haghbin of Oppenheimer added that while "there is no economic rationale" for momentum, there is a behavioral explanation: "Humans chase performance."

Smart said that while he found the research on momentum interesting and robust, implementation gave him pause. Momentum funds and exchange-traded funds, as we've pointed out in Barron's, sometimes does not deliver on promises because they are high-turnover strategies that can eat into returns. And more systematized strategies stumble when they can't pivot quickly enough to capture a wind change in the market.

Smart recast the old Wall Street fable about a monkey throwing darts at the business pages of a newspaper, and the primate will select stocks that beat picks from active managers. "What people don't talk about is that the monkey actually outperforms the market, too," said Smart. The monkey would pick a mostly small-cap portfolio because the font for stock tickers is the same, no matter the market cap and small caps far outnumber large caps. Is that a bad thing, that a monkey can beat the broader market? "No," said Smart, "but the question should be: Can I do that in a cost-effective way?" He was alluding to the high cost of implementing an effective momentum strategy.

How can an investor evaluate funds? Lavine suggested doing a holdings-based risk analysis using models or analytics. Regression also works, but that requires a return history, which many of the newer funds don't have.

One more thing: Smart said that before evaluating a fund, ask why are you investing and what you believe in. He wasn't pushing for self-reflection; he feels that investors should understand that factor-based funds are tools that can be used to achieve different goals. Just as a screwdriver can be used to pop open a can of paint, as well as turn a screw, a low-volatility strategy can be used to lower overall portfolio volatility or to reach a performance-based objective.

Size, value, momentum, low volatility, and more recently, liquidity, are on the list of so-called factor strategies that when harnessed, can supposedly deliver risk-adjusted returns superior to those weighted by market cap.

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